Drug Companies Need To Do Their Jobs

President Trump emphasized during his State of the Union address his determination to fulfill a campaign promise to lower prescription drug prices.

His administration already is making progress: Food and Drugs Commissioner Scott Gottlieb is leading his agency to dramatically accelerate approval of generic drugs. Competition in generic drugs – which make up 87% of drug consumption in the U.S. – will lower costs and improve the supply line. It also will keep bad actors like Martin Shkreli from finding and exploiting production gaps that allowed him to increase the price of an old but vital drug, Daraprim, 56-fold from $13.50 to $750 per pill until a competitor showed up.

Dr. Gottlieb also is working very hard to bring the FDA drug approval process into the 21st century, including new technology and approval reengineering. Because it takes 12 years and more than $2.4 billion to bring the average new drug to market, anything that speeds up the process can help to take pressure off prices.

The Centers for Medicare and Medicaid Services also working on lower drug costs. It approved late last year a new rule governing the 340B program, originally designed to give safety-net hospitals and lower-income patients access to drugs at a heavily discounted price.

But the 25-year-old program is being seriously abused, with big hospital chains buying up safety-net providers and clinics to tap into the 340B discount pipeline. They reap profits of 50% or more by acquiring drugs at the steeply-discounted price—but reports show they are seldom passing the savings along to patients.

Two noted physicians writing in the Journal of the American Medical Association conclude that “the financial benefits of the 340B discounts are accruing almost entirely to hospitals, clinics, and physicians; and patients’ out-of-pocket costs and total cost of care are being increased.”

Clearly, these 340B abuses are a factor in forcing higher drug prices on those outside the system. CMS Administrator Seema Verma announced in November the price discounts must be passed along for certain drugs to help Medicare beneficiaries with their cost-sharing requirements, providing seniors an estimated $320 million this year in savings.

Prescription drug spending represents only about 10% of overall health spending in the U.S., yet it gets a disproportionate share of attention from the public and politicians.

There are a number of reasons for that, which we explain here, largely due to distorted and often unfair insurance payment policies. Consumers are forced to pay a larger share of their drug bills out of pocket than hospital or other health costs, especially if they need newer, specialty drugs. Their experiences shine a spotlight on the problem when they are told their share of a prescription drug co-payment is hundreds or even thousands of dollars.

Some are arguing that another reason U.S. consumers pay high drug prices is because citizens in other developed countries pay so much less, generally because their governments demand cost-based pricing from drug makers.

They are right. Consumers in the U.S. spend about three times as much on prescription drugs as patients in Europe—France, Germany, Italy, the UK and so on. And prices are 30% or more lower there than in the U.S.

Researchers from the University of Southern California find that the U.S. market accounts for as much as 78% of all global drug profits. It needs to be said that these profits are the lifeblood of pharmaceutical innovation that is producing new and better drugs every day, sometimes leading to cures of once intractable illnesses like Hepatitis C.

If Europeans were to pay their fair share of the research budget, researchers Dana P. Goldman and Darius N. Lakdawalla of USC’s Leonard D. Schaeffer Center for Health Policy & Economics say there would be a $10 trillion welfare gain for Americans over the next 50 years and $7.5 trillion for Europeans. This would be primarily because of the increase in drug discovery leading to better outcomes for patients, both in quality and length of life.

They say the U.S. “must press other countries to pay their fair share. As we reexamine trade agreements, foreign drug-pricing schemes should get careful scrutiny, and ways to make up innovation funding shortfalls should be on the table.”

This seems like a perfect opportunity for the president, who is known for the Art of the Deal, to negotiate with others wealthy nations to pay their share of pharmaceutical research and development to help lower prices for U.S. consumers.

Americans fund a disproportionate share of research to treat diabetes, heart disease, and Alzheimer’s. “These diseases don’t recognize borders and neither should the resources needed to fight them,” Goldman and Lakdawalla write.

We also are hearing calls again to force Medicare to “negotiate” drug prices. Medicare, which covers 55 million seniors, does not negotiate. Such a big purchaser would be a monopsony that would set prices, much like European nations do now. The result would be just what we see there: Research budgets would wither, and the promise of new treatments and cures would fade.

Like it or not, the U.S. is the medicine chest for the world, and pharmaceutical progress must continue. We must continue to take the lead, but that means taking a scalpel to these misguided and unfair policies that are artificially pushing prices up for U.S. consumers.

And it also means ignoring the misguided claims that big companies—inside and outside the health sector—must step up with “corporate social responsibility” to fill the gap left by inadequate government programs.

The latest advocate for this scheme is BlackRock CEO Larry Fink. In his 2018 letter to CEOs, he says BlackRock will favor companies that “respond to broader societal challenges.” He wants companies to “understand the societal impact of your business as well as the broad, structural trends – from slow wage growth to rising automation to climate change.”

So companies are supposed to not only compete fiercely in the international marketplace, provide competitive wages and benefits to employees, and create innovative goods and services for demanding consumers, but also invest in social causes whether or not it supports their business model?

In reply, Wall Street Journal contributor Andy Kessler cited Milton Friedman contention that the social responsibility of companies is to earn profits. For stockholders or investors to push their view of social responsibility forces companies “to contribute against their will to ‘social’ causes favored by the activists.”

The American pharmaceutical industry is big and powerful, and its success leads to products that save and extend lives. Don’t we really want these companies to focus on what they do best, and earn and reinvest profits in more and better drugs? Then the people who founded these companies and the investors who prosper from them can set up philanthropic organizations to give away money to support their causes to their hearts’ content.

The market, not social policy, needs to determine profit. The real social responsibility of companies is to excel in their businesses and produce a profit for their shareholders. Genuine competition is the proven technique to achieve lasting growth and the betterment of society.